Is Cronyism Private Enterprise's Fault or the Government's?

Oddly enough, this is perhaps the most frequent argument I have with people on the Left in cocktail party conversations.

It begins this way -- some abuse of "private enterprise" is cited.  Almost every time, I have to point out that the abuse in question could not occur if private companies were not availing themselves of government's coercive power to [fill in the blank: step on competitors, limit choice, keep prices high, rake in subsidies, etc.] Michael Moore's Capitalism: A Love Story is very much in this mold, blaming bad outcomes that result in government interventions on free market capitalism.

Kevin Drum has a great example of this.  Asthma inhalers are expensive because certain companies used the government to ban less expensive competitive products.

Nick Baumann picks up the story from there:

The pharma consortium transformed from primarily an R&D outfit searching for substitutes for CFC-based inhalers into a lobbying group intent on eliminating the old inhalers. It set up shop in the K Street offices of Drinker Biddle, a major DC law firm. Between 2005 and 2010, it spent $520,000 on lobbying. (It probably spent even more; as a trade group, it's not required to disclose all of its advocacy spending.) Meanwhile, IPAC lobbied for other countries to enact similar bans, arguing that CFC-based inhalers should be eliminated for environmental reasons and replaced with the new, HFC-based inhalers.

The lobbying paid off. In 2005, the Food and Drug Administration (FDA) approved an outright ban on many CFC-based inhalers starting in 2009. This June, the agency's ban on Aerobid, an inhaler used for acute asthma, took effect. Combivent, another popular treatment, will be phased out by the end of 2013.

In other words, pharmaceutical companies didn't just take advantage of this situation, they actively worked to create this situation. Given the minuscule impact of CFC-based inhalers on the ozone layer, it's likely that an exception could have been agreed to if pharmaceutical companies hadn't lobbied so hard to get rid of them. The result is lower-quality inhalers and fantastically higher profits for Big Pharma.

Rosenthal has a lot more detail in her piece about how the vagaries of patent law make this all even worse, and it's worth reading. But she misses the biggest story of all: none of this would matter if drug companies hadn't worked hard to make sure the old, cheap inhalers were banned. How's your blood doing now, Dr. Saunders?

No one has more disdain than I for companies that attempt to use the coercive power of the government as a competitive weapon in their favor.  Heck, I have barely gone 2 hours since the last time I bashed an industry for doing so.

But the implication that this is all the fault of corporations is just wrong, as is the the inevitable Progressive conclusion that somehow more government regulation and powers are necessary to combat this.

The Left has been the prime cheerleader over the past decades in creating the Federal behemoth that not only allows this to happen, but actively facilitates it.   We have created a government whose primary purpose is to redistribute spoils from one group to another.

Just look at the example he uses.  These drug manufacturers could have protected their markets and products the free market way, by investing tens of millions in more research, manufacturing cost reduction, and customer marketing.   But instead, we have a system where - entirely legally - a company can spend a fraction of this (the chump change amount of half a million dollars) to market to a few dozen people in DC and get the same benefits as investing tens of millions in satisfying customers.    The wonder is not that losers like these drug companies go this route, but that anybody at all still has enough sense of honor to actually invest in the customer rather than in DC bureaucrats.

I put it this way - "invest in customers rather than DC bureaucrats" - because every new regulation, every new government power over commerce is essentially a dis-empowerment of consumers in the marketplace.  Nowhere is this more true than in pharmaceuticals, where the government tells consumers what they can and cannot buy.

In a free market, accountability is enforced by consumers defending their own best interests and new competitors seeking fortunes by striving to serve consumers better than market incumbents.  Every government intervention is essentially saying to consumers that the government is going to make yet another decision for them.  So, having taken over so many decisions of consumers in those huge office buildings in DC, is it any wonder that companies go to DC to market to bureaucrats rather than bother marketing to consumers?

The problem, then, is not that some corporations avail themselves of legal shortcuts to profits.  The problem is that these legal shortcuts exist at all.  The problem is the coercive power of government to intervene in markets, chill competition through incensing, subsidize one competitor over another, etc.  These kinds of stories are going to proliferate endlessly until  that power is scaled back.

The Progressives I argue with come back with one of two answers.

This is a crock, and is the worst bit of enablement for a bad system ever invented.   The folks in government are not bad people -- they are normal people with bad information and bad incentives, and that is never going to change.  After all, something that Drum glosses over here, the agency in hid example went along and did the industry's bidding.  I know why the industry was doing what it did, but why did the agency roll over?  The whole theory is that these are public spirited people without commercial incentives.  Yet they rolled over none-the-less.  And it's not like these government employees are Rothbardian libertarians.  I work with the government all the time.  Their employees are there because they believe in public solutions over private ones.  In outlook and biases and beliefs they look a lot more like Kevin Drum than myself.  So why do they get a pass?  Of the two people here -- the drug company guy and the regulator guy -- which one is not doing his job right for his constituents?  So why does the drug company get the blame?

Response 2:  We just need to ban lobbying and contact with the regulated industry.  The whole theory of regulation is that the regulators are totally knowledgeable about the industry, but they have different incentives so they can work in the public interest.  But how are they going to be totally knowledgeable about the industry without frequent contact?  Or even experience in the industry?  And as to lobbying, lobbying is just speech.  It would be Constitutionally impossible to ban lobbying, and wrong anyway.  Think of it this way-- let's say you ran a restaurant but had to get a government agency's permission for each change in your menu (just as drug companies have to get permission for each change in their product offering).  Would you be happy with a situation in which the government made decisions on your menu without consulting you?  You would want to explain your desired changes and the logic behind them, right?   That's called lobbying, and you would not be happy to see it banned.

  • jdgalt

    So we can't ban lobbying? Fine. I'll settle for banning politicians from collecting any money for future campaigns while in any office. That will at least eliminate the 100% of all lobbying that is just plain bribery.

  • glenn.griffin3

    Your "response 1" got eaten, I think ... I see no underlined text between "two answers:" and "This is a crock"

  • roystgnr

    Okay, that prevents poor and middle class people from contributing to politicians. The rich can just switch to buying political ads directly... and get better value for their dollar, since they no longer have to compete with the proles for media access and attention.

    This has been today's installment of "The Law of Unintended Consequences". Tune in tomorrow to see how "What if we ban ads entirely?" horribly backfires!

  • jimc5499

    I find asthma inhalers an interesting choice for them to try to prove their point. If it wasn't for the junk science that is mainly pushed by the Left, there would have been no cause to change the propellent in the inhalers.

  • mlhouse

    Big pie, lots of pieces. When the amounts that are being lobbied for or against are just rounding errors in the budget no one notices or cares. Make the pie smaller and even the crumbs will be noticed.
    The CFC ban on asthma inhalers was one of the worst decisions ever. The new inhalers are not as effective. It is government run amok.

  • esoxlucius

    A man and a woman are having an affair. One is married the other is not. Which one is to blame for acting unethically? Is it the married one for saying YES to the unmarried one's advances or is it the unmarried one for knowingly propositioning the other?

    The best answer is both, equally.

    The second best answer is the responsibility falls on the married to say NO to the advances of the unmarried because it's only the married that made a commitment to another, third party.

    Businesses ask for rents from government for the same reason sharks eat meat. It's what they do. Businesses walk up to and sometimes over whatever ethical line they draw for themselves in the world. Arguing that a business shouldn't lobby a government is like arguing a shark shouldn't be a carnivore. It's the responsibility of the government to not be captured by the regulated just as it's the responsibility of the prey to not be eaten by the shark.

    I agree with your premise though, if you don't want regulatory capture, governments need to have less power to regulate.

  • HenryBowman419

    The fundamental problem is that there is simply too much money flowing through Washington. With a river of money flowing through DC, everyone dips his or her hand in the water (money) to grab some. Turn off the money to DC, and much of this problem vanishes.

  • Maymount

    In this particular discussion I usually make the point about the direction of the money flow in government - towards the political class... Who has the real power? The people receiving the money. The medical industry didn't spend that much money in DC until the Clinton's tried their attempt at controlling health care.

    Look at the definition of a "Milker Bill".

    The central contradiction in the liberal ethos is that centralized political power has always ended up controlled by "special interests".

  • MingoV

    "Is Cronyism Private Enterprise's Fault or the Government's?"

    It takes two to crony.

    However, the government works to increase its power and control. It then makes easy for those affected by government control to bribe their way to a more favorable outcome or to bribe their way to less favorable outcomes for competitors. Enterprises that refuse to play the cronyism game don't fare as well as those that do. It's like being in a country where bribes are the norm. If you don't bribe government officials, then you'll never get what you need. In both the cronyism and bribery situations, the government bears most of the blame.

  • Larry Sheldon

    As you might suspect, given a binary choice--neither is correct.

    The blame lies wholly with the the voters who want their share of the free lunch.

  • http://itsaboutliberty.com/index.php MNHawk

    Or just take the example from a recent Reason article, about small breweries being up a creek, because of the shutdown. You're a small brewery. It's fall. It's time for your Octoberfest blend. You not only need a School of Government type to sign off on the brew (to protect an infantalized America from a skunky beer, apparently) but you need that School of Government type to sign off on A BLEEPING LABEL. Because an infantalized America might have problems with October being spelled, Oktober.

  • http://itsaboutliberty.com/index.php MNHawk

    So Tim Pawlenty fluffs the rent seekers while in office, just to take the million dollar a year job, assisting rent seekers, when he leaves office.

    Corrupt people are corruptible, no matter what you try to do to prevent. The only solution is to not elect corrupt people. Another impossible proposition when the American people can be bought, for as little as a month's worth of birth control.

  • Zachriel

    Coyote: But the implication that this is all the fault of corporations is just wrong, as is the the inevitable Progressive conclusion that somehow more government regulation and powers are necessary to combat this. The Left has been the prime cheerleader over the past decades in creating the Federal behemoth that not only allows this to happen, but actively facilitates it.

    When corporations were larger and more powerful than government, they ran roughshod over the government. Perhaps today the government is too big, but it has to be at least large enough to take on cartels.

    All developed nations have struck a balance between markets and regulation.

  • Matthew Slyfield

    Error: Object "free lunch" not found!

  • Larry Sheldon

    Tru dat--but that doesn't keep the Free Stuph voters from voting to take your lunch and mine and call it "free".

  • perlhaqr

    It does take two to crony, but whenever I'm talking to lefty types, they always seem to be way more angry over Corporations buying laws than they are about the Politicians selling them. *shrug*

  • perlhaqr

    When corporations were larger and more powerful than government, they ran roughshod over the government.

    Can you provide an example of this?

  • Zachriel

    It was called the Gilded Age. Cartels had inordinate influence on politics and the economy.

  • rxc

    First of all, the Progressives hate all lobbying that does not support their positions. THAT is their real position on lobbying. If the lobbyists support them, then it is not evil, just educating the decisionmakers about the way that things should be done.

    As someone who used to regulate the nuclear power industry, I can tell you that both industry and "activists" lobby a lot, at the upper levels. I.e., the politicians and the politically-appointed leaders of the agency involved. They also try to insert their own people into agencies at the upper-level management level, under the level where they are subject to political appointments. One of the terms for this is "burrowing-in".

    Most of the regular bureaucrats are non-political. In my agency, you had to understand how nuclear power plants worked, in order to regulate them, so the bureaucrats were mostly people with experience with the technology. At the FDA, they would be medical researchers or doctors. At the FCC, they would be electronic engineers. At the FAA they would be more engineers who work with airplanes.

    The lower level people try to do the best they can with the poorly-written laws they are given by the politicians, as implemented by the weasel-worded regulations that the lawyers let them write. If an industry or an agrieved citizen really suffers from a regulatory decision, it is their right, under the constitution, to petition their government for redress (i.e., lobby). They do it all the time, and the lower level bureaucrats have to write the responses to the letters they write. If the aggrieved entity suffers enough they can always go to the courts, or even better, to sympathetic politicians who can hold hearings and read the riot act to the heads of the agency. The head of the NRC had a "near-death experience" like this with a Senate committee back in the early 2000s, after she implemented a "literal compliance" policy for enforcing the regulations.

    It is the responsibility of the political agency heads to avoid these sorts of problems, but they frequently do not understand the technical issues that the bureaucrats face, or even understand the industry they regulate. They may also come into the position with a mission to transform the agency’s area of responsibility, and then things can get really interesting. Recently, the head of the NRC who was appointed by Harry Reid to stop the Yucca Mountain repository, was forced to leave after he completely suborned the Commission structure of the agency – the other 4 Commissioners wrote a letter complaining about his behavior to the Congress.

    The best agencies are the ones that are staffed by people who understand the underlying technology or issue they are dealing with, are managed by professionals, and do not have much political controversy about their mission. When there is controversy about the mission, or large amounts of money to be made, then the activists lobby the politicians, and things get “interesting”. This is where you get your cronyism and rent-seeking behavior.

  • zjohna

    Actually, the problem is too much POWER in the hands of the federal government. It is no longer the limited government our founders envisioned. The Commerce Clause has been warped beyond recognition. Remove the power and the money will dry up faster than a bare foot jack rabbit on a hot greasy griddle.

  • irandom419

    Okay, so why hasn't the NRC approved any Gen 4 stuff like the MSR's that everyone else is looking into like China? Is it because the business model of giving away the reactor and charging for the razor blades/fuel rods is the issue?

  • irandom419

    No, mandate they must work from their home districts like Oregon's Sentor Ron Wydon who could then work from his official home in New York City. Imagine K street having to fly to hundreds of districts to get something passed or having to use teleconferencing and risk hackers releasing the discussion. My favorite is to increase the number of districts at the same historical rate, so we'd have something like 30,000 congress crooks today. That would be entertaining getting them to agree on anything.

    http://www.thirty-thousand.org/

  • bigmaq1980

    That is a claim about an era, not an example.

  • rxc

    The Molten Salt reactor that people are talking about is based on a scientific experiment performed in the 60s, back when we were allowed to do such experiments. It’s name was the MSRE (Molten Salt Reactor Experiment – look it up), and it was intended to see if it was possible to create a ustainable chain reaction in a reactor system that did not have discrete fuel elements. I.e., the fuel was dissolved in the liquid that performed the function of cooling the reaction. It was a successful experiment, because it showed that it was possible, but it was nowhere near any sort of engineering test bed. I believe that they have still not decommissioned it yet, because of all of the technical issues.

    You have to realize that when you dissolve the fuel in the coolant, this means that you have to completely contain the coolant at all times, because any leak creates a real mess that is almost impossible to clean up, and drives costs for the facility to astronomical levels. Discrete fuel reactors have the fission prducts contained in structures that are designed for this purpose, so they are only moderately difficult to handle.

    But when you have the fission products dissolved in the coolant, maintenance of the entire plant becomes a real nightmare. EVERYTHING has to be done remotely, which is very difficult if you want to make real power, not just a scientific experiment. In LWRs, pinhole leaks in fuel elements can be cause to remove the fuel from the reactor because they contaminate the rest of the system and make maintenance more difficult.

    You also have to add an entire fuel reprocessing plant to the power plant design, because the MSR design requires that the FPs be removed from the coolant stream during operation, continuously. And then the FPs have to be stored, on site, in some sort of container which has to be kept cool and shielded and protected. Discrete fuel elements are pretty resistant to tampering because if you picked up a used one, you would die pretty quick (think minutes). And LWR elements are heavy (~1200 pounds), so you need machinery. The FPs from the MSR cannot be solidified for quite a while after they are created, so the storage system for them is going to be a liquid, which makes things much harder than storing discrete fuel elements in a steel cask on a concrete pad.

    The “benefits” for a MSR are frequently stated to be that it cannot melt-down. Well, it won’t melt down like a discrete fuel reactor, because the fissionable material and the FPs are melted into the coolant, by design.
    So you start out with a fluid that is incredibly nasty, and then you still have to deal with the decay heat, because that doesn’t change. It is just a bit more diffused and spread out through a network of piping and pumps and storage vessels that have to be kept cool or else they will fail and the FPs will all get out.

    All of the hype about MSRs, and the Pebble Bed reactor, is just that – hype by people who have never actually built a real power reactor. The NRC does have people looking at the designs that have been proposed, but these designs are still just at the cartoon stage. No one has done detailed
    engineering studies because those cost real money. And the devil is in the details. I believe that the Office of Research is the organization that is looking at them, because it is unlikely that anyone who is rational and financially responsible will ever build one.

    The biggest push for these reactors is coming from people who think that thorium is the salvation of the energy situation, but they are either (1) delusional, or (2) (south Asia)-Indian, or (3) both. There is no shortage of uranium – if necessary, it can be extracted from seawater at a price that would have a miniscule effect on the cost of the power produced with it.
    India has an enormous amount of thorium, and they would love the US to
    spend a lot of resources to develop the technology so that they can use the
    thorium.

    The last thing the nuclear industry needs is another research reactor project, where enormous amounts of money get spent to develop all
    the new materials, new process streams, new (non-evolutionary) fuel designs, and then have the price of the electricity be comparable to what comes out of solar panels (or more), and end up with something that cannot be decommissioned.

    And don't get me started on pebble bed reactors...

  • Rich

    Suggestion for response #2:
    Any person holding a mandate to represent The People should actually represent The People. Therefore, any bit of information exchanged between a lobbyist and an elected representative should be accessible to The People.
    The problem is the asymmetry of information in the lobbying process. Cronyism comes in when a lobbyist and a legislator can exchange information in confidentiality (during a dinner, on a golf course, inside the limousine...). After that, the legislator can format the raw information to manipulate the public opinion, delete immoral bits and give a truncated version to the People through a well arranged press conference.
    Then you get into the Shannon entropy: the lobbyist and legislator have had a discussion about a dog, but in the press conference the word becomes "mammal". This is the wooden language.
    The only solution to the problem of cronyism is that any information exchanged with a person holding a mandate to represent the people should be neutral to the public domain: unformatted, uncut, live and raw. A live broadcast of the activities of the elected representatives is necessary.

  • steve

    Its a feature. Not a bug